Credit Default Swaps: The Vanilla Essence
First published:
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Conclusion: at the ‘Exit Checkpoint’
Foreword
Preface
A credit default swap snapshot
Parties and key players
Documentation and standard trading conventions
Credit risk period, scheduled termination date and termination date
Fixed amounts, floating rate payer calculation amount and initial payment amount
Qualifying guarantee and qualifying affiliate guarantee
Reference obligation
Subordination and the senior non-preferred supplement
Outstanding principal balance and due and payable amount
Obligations and deliverable obligations
Credit event overview
Bankruptcy
Failure to pay
Repudiation/moratorium
Restructuring and redenomination
Governmental intervention and contingent convertible capital instruments
Successor determinations
Publicly available information and eligible information
Notices
Business day terms and timing rules
Event determination date and settlement methods
Auction settlement
Cash settlement
Physical settlement
Physical settlement fallback procedures
Orphaning
Fixed recovery transaction and reference obligation only trade
Novation and early termination
Economic sanctions: compliance challenges
Disclosures and regulations
Conclusion: at the ‘Exit Checkpoint’
Appendix
References
31.1 THE HAZARD CALLED “RISK”
We have now reached the “Exit Checkpoint” of the expedition and can reminisce over the camera roll. The expedition not only focused on the theoretical review connected with a single-name CDS, but also examined the product through the lens of its economic and legal risks under the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b).
Risks are, without doubt, the by-product of investing in any financial instrument. They come in different shapes and sizes, with many familiar to the market, while others, such as crypto asset trading and climate change, constitute new challenges. While some risks are more intuitive and apparent, others can be unexpected and hidden.
The efficient operation and pricing of a CDS is dependent on the ability of investors to accurately assess default risk. Although active steps can be taken to control risks that are identifiable, this book has highlighted that risk takers are also plagued by the uncertain actions of reference entities. Furthermore, where there exists an activist investor, and/or where “narrowly tailored activities”
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